Friday, May 6, 2011

A Future Scenario for Asia

The ADB says the Asia Century is already nearly half over

The notion that the 21st century is the Asian century must not be taken for granted, warns the Asian Development Bank in a thoughtful and critical document Asia 2050: Realizing the Asian Century.

The report was unveiled this week at the bank’s annual meeting in Hanoi. The ADB’s gurus warn that progress could easily stall so that by 2050 instead of accounting for more than 50 percent of the global economy its share would be only a few points higher than its 27 percent today. It may be that by 2050 the Asian century will be almost at an end -- that history will show that it started in 1960 and is already more than halfway through.

For sure, the 50 years so far have seen a cascade of success, starting with Japan’s post-war revival, moving to the NICs – Korea, Taiwan, Hong Kong and Singapore – in the 1960s and1970s, on to Southeast Asia in the 1980s and early 1990s and hence to China. Indeed the sheer scale of China has both served to overshadow earlier successes elsewhere and to give many both in and outside Asia the idea that Asian progress towards world supremacy is almost inevitable.

Yet all three parts of Asia -- the already rich, the middle income and the poor but big potential states-- face varying but large obstacles to success. Nor do they always compare well with non-Asian countries at similar current levels of development. Although Asia has the capacity to be the global leader in sustainable growth led by new technologies and cross-border cooperation, there is no certainty that it will do so.

The biggest single obstacle to another fort years of rapid growth is what is known as the “middle income trap” by which countries get to annual per capita income levels of US$4,000 to US$12,000 (there is no precise definition) on a purchasing power parity basis but find themselves unable to sustain advance to the top income tiers. There are several examples of this. The ADB specifically mentioned Brazil which grew at 6 percent for 100 years then stalled for nearly 50 years. Latin America has even worse examples – Argentina went from being very rich a century ago to middle income thanks to poor governance and over-reliance on agricultural commodities.

The only Asian countries thus far to have escaped the trap are Japan, Korea and Taiwan. (As commercial entrepots, Singapore and Hong Kong don’t really count). Many believe that Thailand is already in that trap and Malaysia probably as well, particularly if one removes the commodity price boom from the equation.
The big question now hangs over China. Its growth can no longer rely on an increase in the workforce, which is static after rising rapidly for two decades, nor on the shift of the rural population to more productive work in the cities. According to one non-ADB source, the annual urban migration rate has already fallen from 18 million to 12 million and will soon fall to 6 million annually. Nor may China find volume export growth as easy to generate nor foreign capital to bring its technology.

So can China make that lift to the Taiwan-Korea level? Some of the factors appear in place or getting there – educational improvement is continuing and there is excellence in some areas. Savings and ability to invest in new technology are high. China’s sheer scale may help, particularly if world trade becomes less free. But the ADB warns, without naming specific countries, of the dangers of poor governance, which it said was deteriorating in some countries, and corruption.

Much greater efforts are needed to improve income distribution which is not only a matter of social justice but is a necessary to create the broad base demand to drive growth and ensure high standards of education across the community. Much more effort is also needed to address climate change and pollution issues.

China, many analysts believe, can continue to see 7 percent annual productivity growth for the next 10 years as its investment in technical skills bears fruit. But the beyond that predictions are more difficult. It remains unclear whether China will succeed in better distributing income. It may not be in the same danger as Latin America – Brazil has long been characterized by income variations summed up in the phrase “Belgium in India”. But clearly Japan, Korea and Taiwan had very much more equal distribution at the same stage of development.

The ADB does not mention the Soviet experience, but despite excellent education and high savings its growth from middle income status to hope of challenging the west stalled in the 1960s due to the rigidities of state control, isolation and spending on arms. It may be particularly relevant to China given its political system, size, low fertility, potential for return to inward-looking self-sufficiency and strategic rivalry with the US.

More youthful middle-income countries such as Indonesia can grow a lot before they need to worry about the trap. Late starters like Vietnam and laggards such as Burma and the Philippines may increase the slower pace of growth in the more developed parts of Southeast Asia. But it is too early to be sure that the latter two can improve their performance.

Asia too still needs strong performance from its richest – and oldest. For Japan, the impact of a shrinking workforce may be delayed for a decade or so by people working to 70 or more, not 65, and by more women working. The same will apply to Korea and Taiwan in the subsequent decade. But the demographic challenge is huge. There is little reason to expect that they will do appreciably better than the advanced western societies, particularly the US, which are aging more slowly.

The burden of Asian outperformance over 40 years is going to fall increasingly on South Asia, which by 2050 will be home to at least 45 percent of all Asians. In the short to medium term the still relatively high levels of youth dependency will constrain savings, investment and productivity growth. These are falling gradually and the sub-region will reap a long-term demographic dividend.

But the size of that dividend will depend in particular on achieving huge improvements in education and women’s participation in the workforce, and in health. These countries lag far behind not only Southeast Asia but also Latin America, the Middle East and much of Africa.

India lies near the bottom in terms of education, Pakistan in the role of women. Bangladesh has done better on both counts but from a very low base at the time of independence. Sri Lanka has always done well on social indicators but politics has thwarted its ability to transform the economy.

All this points not just to the better policies and execution in many countries but also improvement, says the ADB, in cooperation on issues ranging from climate change effects to maritime safety. It needs more progress on reducing regional trade and investment barriers – particularly in South Asia as well as Asian support for the open international trading system which has served the region (or at least those countries which took advantage of it) over the past 50 years.

There is still plenty of reason for optimism but, the report implies, less triumphalism and more focus on addressing weaknesses is needed.
by Philip Bowring

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